Michael Pettis — Why market liberalisation now may hurt China more

In the end, while standard macroeconomic reforms may work in theory -- albeit under an unrealistic set of assumptions -- they’ve never worked in practice. Rather than eliminating the controls that protect China from a financial crisis, leaders should confront their debt problem head-on and begin deleveraging.

For that to happen, it would help if the decision-making process were more, not less centralised. Only forceful action from the top can overcome the tremendously powerful vested interests that are blocking the redistribution of local-government wealth.

A more liberal China may be desirable in the abstract -- but not until a more controlled China gets a handle on its debt problems.

Today
Why market liberalisation now may hurt China more

Michael Pettis | Professor of Finance at the Guanghua School of Management at Peking University in Beijing

See also

While China's government debt remains contained, at 46.9 percent of GDP as per latest figures from the Bank for International Settlements, top policymakers have recently raised concerns about a sharp build-up in household debt.

Outstanding household consumer loans have surged close to 30 percent since the middle of last year and reached 30.2 trillion yuan as of October.

Outstanding yuan-denominated property loans amount to 31.1 trillion yuan and individual mortgage loans totals to 21.1 trillion yuan as of the third quarter of 2017, data from the People's Bank of China showed.

Yet, at the same time, China's economy is said to be held back by the traditionally high level of household saving, which is supposedly holding back restructuring from an investment-based economy to a consumption-based one.

CNBC
China's debt is growing at a faster pace despite years of efforts to contain it

Reuters

Kenneth Rogoff — A New Deal for Debt Overhangs?

Rogoff outlines three alternatives for addressing the EZ crisis, or crises, and suggests one.

Project Syndicate
A New Deal for Debt Overhangs?
Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003

Larry Elliott — IMF says Greece needs extra €50bn in funds and debt relief

International lender issues strong message to Europe by warning that Athens’ debts are unsustainable and it needs 20-year grace period on debt repayments

The International Monetary Fund has electrified the referendum debate in Greece after it conceded that the crisis-ridden country needs €50bn (£35bn or $55bn) of extra funds over the next three years and large-scale debt relief to create “a breathing space” and stabilise the economy. 

With three days to go before a knife-edge referendum, the IMF revealed a deep split with Europe as it warned that Greece’s debts were “unsustainable”. 

Fund officials said they would not be prepared to put a proposal for a third Greek bailout package to the Washington-based organisation’s board unless it included both a commitment to economic reform and debt relief. 

According to the IMF, Greece should have a 20-year grace period before making any debt repayments and that final payments should not take place until 2055. 

The IMF’s analysis will be seized upon by Alexis Tsipras, the Greek prime minister, who has been insisting that he will only agree to tough new austerity measures if Greece is granted debt relief. 

Maybe Joe Stiglitz's allegation of "criminal responsibility" in a recent Time interview woke some folks up at the IMF. Dump the blame on the Germans.

The Fund has traditionally viewed debt relief as an integral part of any package to improve the economic prospects of a country seeking help, but it has met resistance from European governments fearful that the cost would have to be met by their own taxpayers. 

In response to criticism that the IMF has failed to tackle intransigence in European capitals against a further debt write-off, a senior IMF official said: “We are asking the Greeks to do very difficult things. We are also asking the Europeans to do something very difficult.

The Guardian
IMF says Greece needs extra €50bn in funds and debt relief
Larry Elliott, Economics editor
ht Clonal

Joseph Stiglitz — How Europe Failed Greece Over Austerity Plight

So, what is to be done? First, let us be clear: Greece could be blamed for its troubles if it were the only country where the troika’s medicine failed miserably. But Spain had a surplus and a low debt ratio before the crisis, and it, too, is in depression. What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance.…

AlterNet
How Europe Failed Greece Over Austerity Plight
Joseph Stiglitz | University Professor at Columbia University, recipient of the 2001 Nobel Memorial Prize in economics

Liquidate, liquidate, liquidate

Here's a summary of this counter-MMT position on resolving the financial crisis in the EZ:

...Obviously there will never be a “good time” to purge the debt from the system, however, doing this at the top of a credit boom might actually not be a bad moment as it provides countries and households with a situation were they have more freedom to adjust to changes in the economy. For instance they can move closer to where there is work (because they can actually sell their house without being stuck with a huge amount of negative equity) or re-educate (because they are not burdened with student loans that prevent them from taking on new education), which should provide stimulus on its own to avoid a deflationary spiral. A study by the McKinsey Global Institute (Debt and deleveraging (2010)) shows that deleveraging through default is tough in the beginning, but that growth will quickly pick up at an increased rate and the subsequent 10 year GDP growth is the highest compared to all other solutions (and it will also yield the largest increase in GDP 15 years later, compared to when the deleveraging began). Worries about a deflationary spiral are mostly based on memories of the Great Depression, but the evidence of other default episodes shows that the outcome of the 1930’s is not the de facto result....

What is needed, in combination with the debt relief we talked earlier about, are structural reforms. The austerity or structural reforms should have the goal of preventing that countries will in the future end up in the same situation as they are now, but should not try to solve the current debt problem. Strong changes to entitlement programs are needed, as well as health care and housing overhauls, but these structural changes should be gradually implemented alongside a long term plan to reform. This gives society time to adjust, employees to re-school, homeowners and house prices to adjust and families time to switch to a more debit financed system of health care and education instead of one based on credit and student loans....

A technocratic government could be very well suited to implement these structural reforms. However, technocratic can have different meanings, from the one-party China model to the technocratic-military hybrid-model in Egypt where strong military power is coupled with civilian expertise with respect to social and economic issues (The Economist, 19/11/11). These models are far from desirable in Europe of course, citizens simply would not accept them. Technocratic governments could however be successful for short periods of time and the situation as described in the previous section might be one: technocratic governments might be the tool to overcome the difficulties of implementing structural reforms and give countries a good fresh-start and long-term vision for the coming decade. This would be a very noble cause for any technocratic government, but as ever things are not so simple, since even technocratic governments have an "agenda".

The current governments in place in Italy and Greece are puppets of the banking system, making sure that countries do not default and pay as much interest for as long as possible by implementing short term austerity measures. This is not the type of technocratic government these countries need. They need a technocratic government that sees that the current debt burden is unsustainable and cannot be serviced, acknowledging that defaults are necessary. They should seize this opportunity to change the financial system and implement structural reforms, while exercising their powers to facilitate orderly defaults for both governments and household debt. This way countries will be able to start from a situation where there is breathing room to implement much needed structural reforms throughout society.

Read the full post al Zero Hedge
Europe Needs Debt Relief And Structural Reforms, Not Hyperinflation

by Philip Stive and Dennis Buitendijk

MMT would agree that there needs to be debt restructuring but it would disagree about the rest of the proposal involving austerity and so-called "temporary" technocracy.